NHS redundancy pay

How redundancy pay is calculated

The calculation is one month of pay per complete year of NHS service, with a floor of two years and a ceiling of 24 years (24 months of pay). 'A month's pay' means one twelfth of annual basic salary plus any London weighting (HCAS) and regularly received supplements like unsocial hours premia, averaged over the last three months before the redundancy date.

Service is rounded down to whole years for the calculation, so an employee with 7 years and 11 months of service gets 7 months of redundancy pay, not 8. Partial years do not count.

The annual salary cap

Redundancy pay is capped at an upper salary limit, set by the Treasury and updated annually in line with the Average Weekly Earnings index. Staff who earn above the cap have their redundancy pay calculated as if they earned the cap, not their actual salary. The cap mostly affects Band 8b and above staff and some senior Band 8a staff with London weighting.

The cap and the underlying NHS Pension Scheme rules also interact for staff over age 55 who are taking redundancy and drawing their pension immediately. This combination is a complex area; specialist trade union or independent financial advice is worth getting before signing a settlement.

Reckonable service

Reckonable service is continuous NHS service across any of the four UK nations. A move between NHS Trusts does not break service as long as the gap between contracts is less than 12 months. Time on maternity leave, paternity leave, adoption leave, shared parental leave and authorised career breaks counts. Service before age 18 does not count.

Service in agency or locum roles outside a substantive NHS contract does not count, even if you were doing the same job. This is one of the reasons long-serving NHS staff are reluctant to take agency work between substantive roles: it can break service in a way that affects sick pay, redundancy and pension all at once.

Tax treatment

The first £30,000 of any redundancy payment is tax-free under UK tax rules. Anything above £30,000 is taxed at your marginal income tax rate. National Insurance is not deducted from redundancy pay. Pay in lieu of notice (PILON) is taxed and NI'd as normal salary, not as part of the redundancy lump sum.

If the redundancy is paid late in the tax year and pushes your total income across a higher-rate or additional-rate threshold, the taxable portion of the redundancy is taxed at the higher rate. Spreading the payment across tax years is not usually possible because the redundancy is a single event tied to the termination date.

Pension and redundancy together

Staff over age 55 with at least two years of pensionable service can elect to take immediate payment of their NHS pension on redundancy, even if they have not reached normal pension age. The pension may be reduced for early payment depending on which section of the NHS Pension Scheme you are in (the 1995, 2008 or 2015 sections each have slightly different rules).

Some Trusts have offered enhanced redundancy packages that included buying out the actuarial reduction on early pension payment. These deals are rarer now than they used to be but still happen occasionally, particularly in large restructures. Whether it is worth taking depends on your individual numbers; the NHS Business Services Authority pension modeller and a specialist pension adviser are worth using.

Common questions

How much NHS redundancy pay will I get?

NHS redundancy pay is one month of basic salary for each complete year of reckonable service, up to a maximum of 24 months. You need at least two years of continuous service to qualify. The figure is capped each year by an upper salary limit, set by the Treasury, which is uplifted in line with average earnings. Staff whose salary is above the cap have their redundancy pay calculated as if they earned the cap, not their actual salary.

What counts as reckonable service for NHS redundancy?

Any continuous service with an NHS organisation in the UK counts, including service across England, Scotland, Wales and Northern Ireland. A break of less than 12 months between NHS jobs does not break service. Service before age 18 does not count. Time on maternity leave, adoption leave and authorised career breaks counts. Service in agency or locum roles outside a substantive NHS contract does not count.

Is NHS redundancy pay tax-free?

The first £30,000 of any redundancy payment is tax-free under UK tax rules. Anything above £30,000 is taxed at your marginal income tax rate. National Insurance is not deducted from redundancy payments. If you take redundancy late in the tax year, this can push you into the higher-rate band on the taxable portion.

Can I take voluntary redundancy in the NHS?

Yes, when an NHS Trust is restructuring it sometimes opens a voluntary redundancy scheme alongside the compulsory process. The payment is calculated in the same way as compulsory redundancy. Voluntary redundancy is usually offered first because it reduces the need for compulsory exits, but the Trust does not have to accept every voluntary application.

What happens to my NHS pension if I'm made redundant?

Your pension remains intact. You can either keep your accrued benefits in the NHS Pension Scheme and draw them at normal retirement age, or transfer them to another scheme. If you are over 55 and have at least two years of pensionable service, you can also choose to take immediate payment of your pension under the redundancy provisions; the rules are different for the 1995, 2008 and 2015 scheme sections.

Do I get notice on top of redundancy pay?

Yes. You also get statutory and contractual notice. Most NHS staff have a contractual notice period of one to three months depending on band. You either work the notice or are paid in lieu (PILON). The notice payment is separate from the redundancy lump sum and is taxed and NI'd as normal salary. The redundancy lump sum is a separate calculation.

What if I refuse a suitable alternative role?

If the Trust offers you a 'suitable alternative employment' that is broadly equivalent in pay and grade, and you unreasonably refuse it, you can lose the right to redundancy pay. The reasonableness is judged on factors including the new role's location, hours, status and pay. Trade union representation is important if you are being asked to consider an alternative role you think is not really equivalent.